EUR/USD
The corrective recovery off 1.3543 is likely to stall and renewed bear pressure is expected on Friday's 1.3543 low. Last week's gravestone doji candle is behind the latest downside threat and support from the top of the weekly Ichimoku cloud at 1.3510 is likely to be called into action. The 38.2% Fibonacci retracement level of the 1.2860/1.3862 rally lies just beneath, at 1.3479. Only a break above Friday's spike high at 1.3680 would put bulls in control of the near-term, opening 1.3700 and 1.3770.
GBP/USD
The recovery off Friday's low at 1.6037 is set to extend toward 1.6172. The 1.6037 low has already become a potential bear failure low and a break through 1.6172 would provide confirmation, creating room for a recovery back toward last week's 1.6277 reaction high. Only a reversal below 1.6037 would put bears in control of the near-term, exposing 1.5990.
USD/JPY
Friday's strong recovery off 81.10 keeps the three-month bear pennant intact and consolidation is underway off 82.47. More downside consolidation is expected toward the 81.85 area, which would be exposed on a break below 82.16. A recovery above 82.28 re-open the 82.47 high, but only a break through 82.47 would suggest this recovery is sustainable.
AUD/USD
Suffers a corrective setback off Friday's spinning top high at 1.0201, which has scope for the 1.0050 area. A break below 1.0098 would bring the 1.0050 support area into focus, but the positive weekly candle suggests downside risk is limited. A push through resistance at 1.0163 would be required to re-open the 1.0201 high and threaten a return to the December 2010 28-year high at 1.0258.
FOREX FOCUS
Kate Barker is right. The Bank of England's credibility is very much at stake, especially if U.K. inflation does not fall back as Governor Mervyn King has promised. The central bank risks unleashing a price surge that could seriously damage the recovery down the line. However, as Barker admitted in her speech Thursday, the central bank's dilemma is worse now than it was when she left the monetary policy committee last May. The Bank of England is not alone. This week we have also seen the European Central Bank turning more dovish than expected and the Federal Reserve turning a tad more hawkish than anticipated. Each bank faces its own particular policy challenges, but for all three one issue is key: managing their currencies. Sure, the dollar, the euro and the pound are all free-floaters but that doesn't mean that the economies of the U.S., the euro zone and the U.K. are any less sensitive to currency moves and their central banks any less partial to a bit of subtle currency management. Over the last year or two, the U.S. has come under repeated attack, especially from China, for allowing the dollar to remain weak, undermined by the Fed's extensive program of quantitative easing. Now, as signs emerge that the U.S. recovery is becoming more entrenched and the jobs market is showing signs of improvement, Fed Chairman Ben Bernanke has been able to feed the market a little more optimism. Hopes have risen that more QE may not be needed and the dollar has shown more resilience.
EUROPE
The dollar recovered some ground in European trading hours Monday while sentiment towards the euro soured rapidly after weak German manufacturing orders data. The euro hit a fresh two-week low against the dollar and was under pressure against the pound after German manufacturing orders fell 3.4% in December, a worse-than-expected drop, driven by a shortage of large orders and low demand for new vehicles, the economics ministry said Monday. Moreover, the fact that European Union leaders failed to make any progress in talks Friday over a German-led plan to boost the competitiveness of weaker euro-zone economies, may also be weighing on sentiment towards the 17-country currency, market participants said. "The EU summit failed to deliver any real progress, in fact it was actually quite negative," said Ian Stannard, a currency strategist at BNP Paribas in London. "The differences of opinion were very much exposed by the summit," he added. A large majority of European Union leaders rebuffed a Franco-German plan for reforming the euro-zone economy outlined at Friday's summit. "The fact that the European Union competitiveness pact seems to be failing to gain any interest elsewhere is going to hold up negotiations on the European Financial Stability Facility," said BNP's Stannard. To a large extent, market participants were expecting an agreement to increase the EFSF's lending capacity at the end of March. Looking to the session ahead Monday, with no major data due for release, European Central Bank President Jean-Claude Trichet's appearance before the European Parliament Committee at 1400 GMT will be closely watched.
ASIA
The euro rose against the yen and the dollar in Asia Monday as generally stronger regional equities encouraged buying of the risk-sensitive common currency, which also benefited from bargain hunting following falls in New York on Friday. For the rest of the global day, traders will be watching European Central Bank President Jean-Claude Trichet's appearance before the European Parliament Committee at 1400 GMT. Trichet last week cut into the euro's recent rises by expressing support for interest rates to stay at current levels. Any further dovish comments could damp the common currency's modest rise so far Monday, dealers said. Other downside risks also lurk for the euro in industrial production data from the euro-zone powerhouse economies this week, dealers and analysts said. Germany releases its industrial production index for December on Tuesday, followed by France on Thursday. "We believe the market will react more severely" to any downside surprises in the euro-zone industrial output data, said Sara Yates, a currency strategist with Barclays Capital. Investors have become more cautious following the sell-off in the common currency late last week, and that is "likely to inhibit the market's eagerness" to get more solidly behind the euro this week, even if the data are strong, she said. At 0450 GMT, the euro was up at Y111.95 from Y111.67 late Friday in New York. Against the dollar, the common currency traded up at $1.3616 from $1.3582. Higher share prices in Japan, where the benchmark Nikkei Stock Average traded up 0.64% in afternoon trade, cued short-term investors to buy the risk-sensitive currency, dealers said.
WORLD
The dollar advanced broadly Friday in New York, as initial disappointment with a seemingly weak U.S. employment report gave way to guarded optimism that sluggish labor markets could be poised to rebound. The Labor Department reported that the U.S. economy added a paltry 36,000 jobs, far less than the consensus estimates of 136,000. However, economists were surprised by the unemployment rate, which posted an unexpected drop to 9.0% from 9.4%. After expecting a more-robust jobs number, traders initially jettisoned the dollar in disappointment. They soon bought it back after analysts attributed much of the jobs weakness was to the heavy snowfall that blanketed much of U.S. last month. That kept potential employees in hibernation. "Over the last year, we've added a million jobs, and it takes a long time to eat into the 8 million jobs lost during the recession," said Brian Levitt, economist with OppenheimerFunds Inc. "It's a slightly disappointing report, but it can be explained away due to a very harsh January weather-wise." Friday's jobs data are unlikely to prompt the Federal Reserve to curb its ultra-loose monetary policy, which would help buttress the dollar. However, expectations about a potential interest-rate increase from the bloc of euro-zone nations were decisively squelched by the European Central Bank this week, which deprived the euro of much of its support.
